What expense category is Music Streaming?

Note on IRS Publications: Specific guidance on "music streaming" services is not present in the provided IRS documents. However, the deductibility of costs associated with such services falls under general business expense principles outlined in Publication 334 (Tax Guide for Small Business, 2024) and Publication 535 (Business Expenses, 2022), and rules regarding Advertising (Pub 334/535) and disallowed Entertainment expenses (Pub 463).

Music streaming subscriptions used for business purposes, such as creating ambiance in a store or office, using music in advertising, or for content creation, are common business expenditures. Determining the correct tax treatment requires assessing the specific business use.

How the IRS Views Music Streaming Expenses

The IRS views business expenses based on whether they are ordinary and necessary for carrying on a trade or business. Music streaming costs used for business would generally fall under this umbrella, deductible in the year paid or incurred. The key is the purpose of the expense:

• Advertising: Music used directly in promotional materials or advertisements likely qualifies as a deductible Advertising Expense.
• General Business Operations: Music used for background ambiance in a customer-facing area (like a store or restaurant) or in an office environment is likely deductible as an Other Business Expense if considered ordinary and necessary for that business environment.
• Content Creation: Music licenses or streaming costs necessary for producing business-related content (videos, podcasts) would likely be deductible as an ordinary and necessary expense related to that production.

Important Note: The IRS generally disallows deductions for expenses related to activities considered Entertainment, Amusement, or Recreation. While playing background music doesn't typically constitute an "entertainment activity" in the same vein as providing a show or event tickets, classifying the expense as "Entertainment Expense" for tax purposes is inaccurate and conflicts with current IRS rules disallowing such deductions.

Relevant IRS Publications:

• Publication 334 (Tax Guide for Small Business, 2024) / Pub 535 (Business Expenses, 2022): Provide general rules for deducting ordinary and necessary business expenses, including Advertising.
• Publication 463 (Travel, Gift, and Car Expenses): Details the general disallowance of deductions for Entertainment expenses.

What Expense Category Should Music Streaming Costs Fall Under?

For Internal Accounting: You might use categories like:

1. Music Subscription
2. Software & Subscriptions
3. Advertising & Marketing
4. Overhead Expenses
5. Store Ambiance

For Tax Purposes (IRS Classification):

1. Advertising Expense: If used directly for promotion.
2. Other Business Expense: For most other ordinary and necessary business uses (ambiance, office environment, content creation).
3. Not Deductible: For any portion attributable to personal use.

Music Streaming Use Cases and Tax Categorization (IRS Treatment)

1. Subscription for background music in a coffee shop: Deductible Other Business Expense.
2. Streaming service for music in an office: Deductible Other Business Expense (if deemed ordinary and necessary for the work environment).
3. Music license fee for a radio advertisement: Deductible Advertising Expense.
4. Subscription used for background tracks in business videos: Deductible Other Business Expense.
5. Personal portion of a subscription also used for business: Not Deductible.

Categories to Avoid for Tax Purposes

1. Entertainment Expense: This category is generally non-deductible under current IRS rules. Do not classify background music for customers or general ambiance under this tax category, even if used in traditionally entertainment-focused venues like bars or restaurants. Use "Other Business Expense."
2. Office Supplies: A streaming service is an intangible service/subscription, not a physical supply consumed in operations. This is not the correct tax category.
3. Deducting Personal Use: The portion of any subscription cost attributable to personal listening is not deductible. Allocation is required for mixed-use subscriptions.

Key Considerations for Classifying Music Streaming Expenses

1. Primary Use: Determine the main business purpose: Is it advertising, creating customer ambiance, improving the employee work environment, or direct use in content creation?
2. Ordinary and Necessary: Ensure the expense is common and accepted for your type of business and helpful/appropriate for operations.
3. Business vs. Personal Use: If a single subscription is used for both business and personal listening, only the business-use portion is deductible. Maintain records to support the allocation.
4. Subscription Nature: These are typically recurring expenses deducted as paid or incurred, not capital assets requiring depreciation.

Tax Implications of Music Streaming Expenses 

1. Deductibility: Costs for music streaming services used for ordinary and necessary business purposes (advertising, ambiance, office environment, content creation) are generally deductible.
2. Categorization: Deduct as Advertising Expense or Other Business Expense based on purpose.
3. Non-Deductible Entertainment: Do not categorize as "Entertainment Expense," as this category is generally disallowed for deductions.
4. Personal Use Allocation: The portion of cost related to personal use is not deductible.

How Fyle Automates Expense Tracking & Management

Fyle can efficiently track and manage recurring expenses like music streaming subscriptions and more.

1. Automated Expense Tracking: Forward subscription invoices or payment receipts via Text, Email, Slack, or the Fyle app. Fyle's OCR can extract vendor (streaming service), date, and amount.
2. Real-Time Card Reconciliation: Track recurring subscription payments made on company Visa or Mastercard with Fyle's real-time feeds, simplifying reconciliation.
3. Automated Expense Categorization: Set rules based on the vendor (e.g., Spotify, Pandora Business) to automatically categorize payments under "Subscriptions," "Software," "Advertising," or your relevant internal account, mapped to your GL.
4. Seamless Accounting Integration: Sync categorized music streaming expense data directly with your accounting software (QuickBooks, NetSuite, Sage Intacct, Xero, and more.).
5. Customizable Approval Workflows: Route new subscription sign-ups or renewals for approval if needed.
6. Detailed Reporting and Analytics: Monitor subscription spending across different services or departments.
7. Compliance and Audit Trail: Maintain a digital record with attached invoices for all subscription payments, supporting claimed deductions.

Key Clarification: Fyle helps track and manage payments for music streaming subscriptions. The business is responsible for ensuring the use meets the "ordinary and necessary" criteria for tax deductibility and for correctly allocating between business and any non-deductible personal use.

FAQs Around Expense Categorization Of Music Streaming

1. Can I deduct the cost of the music streaming service I play in my store/restaurant for customers?

Yes, generally. This is typically considered an ordinary and necessary expense for creating a business ambiance and is deductible as an "Other Business Expense." Do not classify it as "Entertainment Expense" for tax purposes, as entertainment is generally non-deductible.

2. What about music streamed in the office for employees?

This can also be deductible as an "Other Business Expense" if it's considered ordinary and necessary for maintaining employee morale or productivity in your specific work environment. It's not deductible as "Office Supplies."

3. Is music used in a marketing video or advertisement deductible?

Yes. Costs associated with music used directly for advertising or promotion generally qualify as a deductible Advertising Expense.

4. My subscription is used both for my business and personal listening. How do I deduct it?

You can only deduct the portion of the subscription cost that relates to its business use. You need a reasonable method to allocate the cost (e.g., based on estimated listening time for business vs. personal) and maintain records supporting that allocation. The personal use portion is not deductible.